QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
THE FRESH START GOAL OF THE
BANKRUPTCY ACT: GIVING A
TEMPORARY REPRIEVE OR
FACILITATING DEBTOR
REHABILITATION?
NICOLA HOWELL *
Providing debtors with the opportunity for a fresh start is popularly
regarded as one of the main goals of bankruptcy legislation. However,
there has been limited analysis of this goal. This article confirms that the
fresh start is one of the main goals of the Australian Bankruptcy Act, and
argues that this fresh start focuses on discharge of debt and does not
explicitly address debtor rehabilitation. A review of the key goals could
examine whether, and to what extent, rehabilitation should also be a focus
of the fresh start in Australian bankruptcy law.
I
INTRODUCTION
In Australia, slightly more than 20,000 individuals entered bankruptcy in 201213, 1 and most of these did so voluntarily. 2 For those choosing to apply for
bankruptcy, it could be assumed that a decision has been made that the costs and
restrictions of bankruptcy (including the surrendering of assets owned at the time
of bankruptcy, or acquired during bankruptcy, and the potential employment and
travel restrictions) are an acceptable trade for the opportunity of a so-called ‘fresh
start’ at the conclusion of their bankruptcy. This fresh start is said to be one of the
main goals of bankruptcy legislation, particularly in Anglo-American legal
* Lecturer, Faculty of Law, QUT, Master of Law (LLM) (Griffith University), Bachelor of
Science (Honours) (The University of Melbourne), Bachelor of Laws (The University of
Melbourne), Bachelor of Laws (University of Melbourne).
1
See
Australian
Financial
Security
Authority,
Annual
Statistics
2012-13
<https://www.afsa.gov.au/resources/statistics/provisional-bankruptcy-and-personal-insolvencystatistics/annual-statistics/annual-statistics-2012-13>. Note that the Australian Financial
Security Authority (‘AFSA’) is the new name for the Insolvency Trustee Service Australia
(‘ITSA’).
2
During 2012-13, the regulator processed 18,993 debtor’s petitions and received 3,001
creditor’s petitions for processing: Insolvency and Trustee Service Australia Annual Report
2012-13 18.
DOI 10.5204/qutlr.v14i3.553
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
30
systems, 3 and it is probably the most important goal from the perspective of
debtors. 4
There are numerous references in legal, policy and political documents that
support the existence of a fresh start goal for the Bankruptcy Act 1966 (Cth)
(‘Bankruptcy Act’), but these documents rarely explain the term. The existence
and scope of the fresh start goal has also not attracted a great deal of attention in
academic commentary in Australia. 5 Indeed, as David Morrison noted in 2009,
there has been little bankruptcy research of any kind conducted in Australia, 6
although more recently, there has been some greater academic attention paid to
this area of law. 7
This lack of clarity about the existence and meaning of the fresh start goal makes
it difficult to assess whether the Bankruptcy Act is achieving this goal. This is an
important issue. Bankruptcy imposes significant costs on individuals, businesses,
government and the community more generally, and it is important to be
confident that the legislation is effective in light of its key goals. Without clarity
3
4
5
6
7
Although Jacob Ziegal has suggested that there is a distinction between the fresh start provided
by in the United States (at least before the 2005 reforms) and what he calls a ‘qualified’ fresh
start provided by the United Kingdom, Canada and Australia: Jacob Ziegel, 'Facts on the
Ground and Reconciliation of Divergent Consumer Insolvency Philosophies' (2006) 7(2)
Theoretical Inquiries in Law 299, 302.
Zagorsky and Lupica suggest that the fresh start is ‘the central theoretical objective of
bankruptcy from the perspective of the debtor’: Jay L. Zagorsky and Lois R. Lupica, 'A Study
of Consumers' Post-discharge Finances: Struggle, Stasis, or Fresh-start?' (2008) 16(1)
American Bankruptcy Institute Law Review 283, 283.
Some exceptions include: Lynden Griggs, 'Bankruptcy Policy and the Decision of the High
Court in Pyramid Building Society (In Liq) v Terry' (1999) 1(1) University of Notre Dame
Australia Law Review 57, discussing the tension between the goals of the fresh start and of
equal distribution to creditors; and John King, 'Moving beyond the 'hard' - 'easy' tug of war: a
historical, empirical and theoretical assessment of bankruptcy discharge' (2004) 28 Melbourne
University Law Review 654 , discussing the appropriate length of bankruptcy.
David Morrison, 'Recent developments: Bankruptcy research in Australia: a review' (2009) 17
Insolvency Law Journal 209, 209. In a 1997 paper, Bennetts was more critical of the lack of
bankruptcy research, and suggested that ‘the formation of our bankruptcy policy usually
reflects fundamental assumptions of fact unsupported by empirical research’: Keith Bennetts,
'Bankruptcy Reform: The Significance of Systematic Data and Consultative Processes in
Developing Our Bankruptcy Law' (1997) 1 Flinders Journal of Law Reform 199, 201.
There have been a number of studies analysing the official bankruptcy statistics, including Ian
Ramsay and Cameron Sim, 'Personal Insolvency in Australia: an Increasingly Middle Class
Phenomenon' (2010) 38 Federal Law Review 283 and Rachel Lee and David Morrison, 'Trends
in Personal Insolvency in Australia : an Update' (2012) 20 Insolvency Law Journal 18; and
John Tribe has compared discharge policies in England and Australia: John Tribe, 'Discharge
in Bankruptcy: An Historical and Comparative Examination of Personal Insolvency Relief in
England and Australia' (2012) 20(4) Insolvency Law Journal 240. A major study has also
recently been funded by the Australian Research Council: Melbourne Law School, Paul Ali,
Ian Ramsay, Kathy Landvogt, Gerard Brody and Fiona Guthrie – ARC Linkage Project (1 July
2013) University of Melbourne <http://www.law.unimelb.edu.au/index.cfm?objectid=
AD169B40-E1E0-11E2-94BC0050568D0140>.
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
31
around the goals of the legislation, evaluating the achievement of the goals, and/or
law reform proposals, is difficult at best. 8
This paper therefore interrogates relevant primary and secondary sources of
bankruptcy law in Australia to identify whether the fresh start is one of the goals
of the Bankruptcy Act, and if so, what is the scope or meaning of this fresh start.
To set the scene, I first examine discussions about the fresh start in the academic
literature, and find that expressions of the fresh start in bankruptcy appear on
continuum. At one end, the idea of the fresh start focuses on discharge of debt (a
‘debt discharge-focused fresh start’). At the other end of the continuum, the idea
of the fresh start encompasses debt discharge, but also broadens to emphasise the
debtor’s rehabilitation through improved financial well-being (a ‘rehabilitationfocused fresh start’).
In the main part of the paper, I examine the legislation, parliamentary documents,
legislation, law reviews, and case law to identify whether the fresh start is a goal
of Australian bankruptcy law, and, if so, what is the type of fresh start that is
provided. I find that these documents support the proposition that the fresh start
is one of the primary goals of the Bankruptcy Act. There is not a consistent view
across the documents about the scope of the fresh start; however, the majority of
references, and the key parts of the Act itself, seem to describe a debt-discharge
focused fresh start.
I then discuss the implications of these findings. Given the importance of the
fresh start goal, and the lack of clarity about its meaning, I propose that the
Bankruptcy Act should be amended to include an objects clause that sets out, with
sufficient clarity, the various goals of the legislation, including the fresh start goal.
As a first step, this objects clause could reflect a debt-discharged focused fresh
start, consistent with the findings in this paper. However, given that a number of
the key law reform documents have also emphasised debtor rehabilitation, I argue
that a wider discussion about the appropriate goals for the Bankruptcy Act would
also be timely. This should consider whether the fresh start goal should reflect a
broader understanding, and encompass a focus on debtor rehabilitation.
II
UNPACKING THE FRESH START CONCEPT
References to a fresh start goal in community, policy and legislative documents
about bankruptcy are frequent, but the term is rarely defined or explained, and
there does not appear to be consensus on its meaning. 9 Instead, as Karen Gross
notes, euphemisms are frequently used to describe the fresh start. 10 Phrases used
to describe the fresh start potential of bankruptcy include ‘a clean sheet’, 11 and
8
9
10
11
Vanessa Finch makes this point in the context of corporate insolvency law: Vanessa Finch,
Corporative Insolvency Law: Perspectives and Principles (Cambridge University Press, 2 ed,
2009) 1.
Karen Gross, 'Demonizing Debtors: a Response to the Honsberger-Ziegel Debate' (1999) 37(12) Osgoode Hall Law Journal 263, 263.
Ibid 264.
Griggs, above n 5, 57.
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
32
‘economic rehabilitation’. 12 Commentators also suggest that the fresh start and/or
discharge is about the debtor “beginning again on the economic treadmill’;13
having a restored ability ‘to participate in the open credit economy; 14 restoring
their ‘financial well-being”, 15 or obtaining ‘longer term financial health’. 16 Karen
Gross argues that one of the reasons for difficulties in defining the meaning of the
fresh start is that ‘the definition requires that we delve deeply into issues many of
us would prefer to ignore or forget’, including issues about money, shame, and the
fact that bankruptcy is not just a legal concept. 17 While these difficulties may be
real, it is important to find a consensus about the meaning as it applies in
Australia.
Reviewing recent literature on bankruptcy and the fresh start suggests that ideas
about the scope of the fresh start in bankruptcy fall on a continuum. At the
narrower end of the continuum, the fresh start is seen as being primarily about the
relief from obligations to repay debts. The fresh start provides the debtor with a
new slate or a clean slate, in the sense that he or she no longer has the burden of
the existing debts hanging over their head. William Whitford provides an
example of this approach, where he describes the fresh start idea as being
summarised:
by the metaphor of a curtain falling on a debtor’s affairs at filing ... Except to the
extent that it is exempt, the debtor’s property is used to pay creditors. Debts not
paid in this way are ‘discharged’, meaning that the creditor cannot look to property
subsequently acquired by the debtor for repayment of the debt. The debtor begins
his/her financial life with a clean slate, or “fresh start”.18
Similarly, Ross Buckley describes the fresh start as being embodied by the
discharge of a debtor’s debts.19 A recent report prepared for the World Bank
(‘the World Bank Report’) also directly links the idea of the fresh start with relief
from debt, by suggesting that historically, the term fresh start ‘refers to a straight
discharge; that is, to the possibility to be freed from debt without a payment
plan’. 20
12
13
14
15
16
17
18
19
20
Katherine Porter and Deborah Thorne, 'The Failure of Bankruptcy's Fresh Start' (2006) 92(1)
Cornell Law Review 67, 68.
Griggs, above n 5, 69.
Margaret Howard, 'A Theory of Discharge in Consumer Bankruptcy' (1987) 48 Ohio State Law
Journal 1047, 1048.
Zagorsky and Lupica, above n 4, 284.
Jean Braucher, 'Consumer Bankruptcy as Part of the Social Safety Net: Fresh Start or
Treadmill?' (2004) 44(4) Santa Clara Law Review 1065, 1070.
Gross, above n 9, 267.
William Whitford, 'Changing definitions of fresh start in U.S. bankruptcy law' (1997) 20(2)
Journal of Consumer Policy 179, 179.
Ross P Buckley, 'The Systemic Benefit of Insolvency Law: a Lacuna in the Australian
Literature' (2003) 11 Insolvency Law Journal 38, 40.
Working Group on the Treatment of the Insolvency of Natural Persons, 'Report on the
Treatment of the Insolvency of Natural Persons' (Report 77170, World Bank, 2013) 115
(‘World Bank Report’). This is contrasted with a delayed new start, where the debtor is
relieved of debts but only after some time and/or after making at least some repayment to
creditors: at 115.
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
33
To the extent that the fresh start is understood in this way, the terms fresh start
and debt discharge are treated, implicitly or explicitly, as mutually
interchangeable. 21 As a result, if a debtor has received a debt discharge (usually
on discharge from bankruptcy), he or she has necessarily received a fresh start.
As suggested in the World Bank Report, the practical problem of insolvency can
be solved, and the fresh start can be achieved, ‘in one procedure’. 22
Other commentators, however, seem to take a broader approach to the scope of
the fresh start in bankruptcy. For these commentators, debt discharge is valuable
and a necessary part of the idea of the fresh start, in that it provides some
‘breathing room’. 23 However, without more, they argue that debt discharge may
not be sufficient to provide the opportunity for a fresh start for all, or even most,
debtors. For example, Zagorsky and Lupica suggest that:
if instead financial distress is a symptom of the confluence of a complex web of
social, economic and financial conditions, then perhaps the discharge is merely a
palliative solution that fails to address debtors’ underlying problems in a
meaningful way. 24
Some commentators make a distinction between the legal fresh start provided by
the discharge of debt, and a financial fresh start, which requires a focus on the
debtor’s prospects for an improved financial future. 25 For example, Jean
Braucher argues for an approach to the fresh start and bankruptcy that aspires “to
improve the long-term financial health of debtors”. 26 This can be achieved, in
part, through prevention of future indebtedness as part of the fresh start goal, 27
and, in this light, Gross and Block-Lieb support financial literacy education in the
bankruptcy process, 28 although they are less convinced about the way that this
goal has been implemented in the United States.29 It also may involve attention to
housing and/or employment prospects. 30 For another perspective, John Tribe has
21
22
23
24
25
26
27
28
29
30
For example, van Apeldoorn explicitly acknowledges that treats the terms fresh start and
discharge as mutually interchangeable: Jan C van Apeldoorn, 'The 'Fresh Start' for Individual
Debtors: Social, Moral and Practical Issues' (2008) 17 International Insolvency Review 57, 59.
The World Bank makes this comparison between the problem of poverty, and the problem of
insolvency: above n 20, World Bank Report, 12.
Zagorsky and Lupica, above n 4, 288.
Zagorsky and Lupica, above n 4, 287.
For example, ibid 283; Gross and Block-Lieb also make this distinction between a legal fresh
start and a financial fresh start: Karen Gross and Susan Block-Lieb, 'Empty Mandate or
Opportunity for Innovation? Prepetition Credit Counselling and Post-Petition Financial
Management Education' (2005) 13 American Bankruptcy Institute Law Review 549, 549.
Braucher, above n 16, 1070; see also Zagorsky and Lupica, above n 4, 286.
Assaf Lichtash, 'Realigning the American Consumer Bankruptcy System with the Goals of the
Fresh-Start Doctrine: A Global Comparative Analysis' (2011) 34 Loyola of Law Comparative
and International Law Review 169, 171.
Gross and Block-Lieb, above n 25, 550; see also Susan Block-Lieb et al, 'The Coalition for
Consumer Bankruptcy Debtor Education: A Report on its Pilot Program' (2004-2005) 21
Emory Bankruptcy Developments Journal 233, 257.
See for example, Gross and Block-Lieb, above n 25, 569; The World Bank also suggest that
there needs to be some attempts to change debtor’s attitudes concerning proper credit use, in
addition to debt discharge: above n 20, World Bank Report, 115.
See for example, Porter and Thorne, above n 12, 119.
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
34
argued that the fresh start also needs to encompass the debtor’s ability to have
access to an account that can be used receiving income and making payments. 31
A fresh start goal that encompasses improved financial well-being, through
changes to debtor circumstances, understanding, abilities and/or actions in relation
to financial matters can be described as a rehabilitation-focused fresh start. Such
a fresh start is located further along the fresh start continuum than a debt
discharge-focused fresh start. Commentators using this wider idea of the fresh
start acknowledge that it cannot be achieved through bankruptcy legislation alone.
Attention may also need to be paid to other laws, policies and programs, for
example, laws, policies and programs that influence housing security and
employability. 32 However, bankruptcy legislation can also help or hinder the
achievement of a rehabilitation-focused fresh start, 33 and bankruptcy can provide
a trigger for access to programs and services outside the bankruptcy system that
may be necessary if this wider idea of a fresh start is to be achieved. 34
This discussion illustrates that commentators have different ways of
understanding the fresh start concept in bankruptcy. Some emphasise the
significance of debt discharge to delivering the fresh start, while others consider
that more is needed if debtors are to truly receive a fresh start. These differences
can perhaps be located along a continuum from a fresh start that is solely or
primarily about debt discharge (the debt discharge-focused fresh start), to a fresh
start that is about debtor rehabilitation in a broader sense (the rehabilitationfocused fresh start). In the next section, I explore the scope of the fresh start in
Australia to identify where it is located on this continuum.
III
UNDERSTANDING THE EXISTENCE AND SCOPE OF THE FRESH START GOAL IN
THE AUSTRALIAN BANKRUPTCY ACT
A Identifying the fresh start goal
The characterisation of the Bankruptcy Act as having a fresh start goal is a
common one, but attention to the task of assessing the correctness of this
characterisation, or the scope of the goal, has been lacking. This is despite the
importance of such a task if an accurate evaluation of the legislation, or of any
31
32
33
34
Tribe, above n 7, 263; Although this may be less of an issue in Australia than in some other
countries, given that in 2012, 96.9% of the population had a transaction account: Chris
Connolly, 'Measuring Financial Exclusion in Australia' (Report, Centre for Social Impact (CSI)
University of New South Wales, for National Australia Bank, June 2013) 13.
See for example, the discussion of the issue of income security in the context of bankruptcy in
Porter and Thorne, above n 12, 118-120.
In Part III, I briefly discuss some of the provisions in the Bankruptcy Act that facilitate or
potentially hinder the achievement of this wider sense of a fresh start.
Karen Gross describes how the law has the potential to be a vehicle for social change in the
context of bankruptcy: Karen Gross, Failure and Forgiveness: Rebalancing the Bankruptcy
System (Yale University Press, 1997) 131, 249.
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
35
law reform proposals, is to be made. In statutory interpretation, 35 courts identify
the purpose(s) or object(s) of legislation having regard to:
•
•
•
Any objects clause in the legislation itself; 36
The terms of the legislation; 37 and
Relevant extrinsic materials, including the explanatory memorandum,
second reading speeches, and relevant Law Reform Commission reports. 38
Consistent with this approach, in this section of the paper, I analyse the legislation
and the relevant extrinsic material to identify the extent of the support for the
existence of a fresh start goal for the Bankruptcy Act. I also identify the extent of
judicial support for the fresh start as being one of the goals of the Bankruptcy Act.
Finding that there is such support for the fresh start as a goal, I identify the scope
of the fresh start that is envisaged, and currently provided for in the legislation.
B The fresh start goal in the text of the legislation
As an express statement, an objects or purpose clause in legislation can make the
overall objects of the legislation explicit. 39 However, there is no overriding
objects clause applicable to the whole of the Bankruptcy Act. Instead, there are
two objects clauses that are relevant to specific parts of the Act: those relating to
the income contribution scheme 40 and the supervised account regime. 41 Neither
of these objects clauses provides any guidance as to the objects of the Bankruptcy
Act as a whole.
In the absence of an overarching objects clause, the text of the legislation provides
guidance as to the existence and scope of any fresh start goal in the Bankruptcy
Act. Perhaps most significantly, section 153 of the Bankruptcy Act provides that
from the date of the conclusion of (or discharge from) their bankruptcy, the debtor
is ‘discharged’ or released from their contractual obligations to pay the debts
proved in the bankruptcy. 42 As debt discharge is an integral element of both the
narrower and wider ideas of the fresh start described above, the existence of
section 153 is consistent with the Bankruptcy Act having a fresh start goal.
Further, once a debtor has been discharged from bankruptcy, he or she no longer
has any obligation to make income contributions to the creditors. 43 Margaret
35
36
37
38
39
40
41
42
43
The purpose of legislation is relevant when interpreting particular provisions of legislation:
Acts Interpretation Act 1901 (Cth) s15AA.
Although an objects clause may not be an exhaustive statement of the objects of the legislation:
Michelle Sanson, Statutory Interpretation (Oxford University Press, 2012) 99.
See for example, Municipal Officers’ Association of Australia v Lancaster (1981) 54 FLR 129,
153.
See Acts Interpretation Act 1901 (Cth) s15AB; Bropho v Western Australia (1990) 171 CLR 1,
[16].
Jan Rohde, 'The Objects Clause in Environmental Legislation - the Nature Conservation Act
1993 (Qld) Exemplified' (1995) 12 Environmental Planning and Law Journal 80, 82.
Bankruptcy Act s 139J.
Bankruptcy Act s 139ZIA.
Bankruptcy Act s 153.
During bankruptcy, income contributions are required once the debtor’s income excess the
relevant income threshold: Bankruptcy Act s 139P.
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
36
Howard has argued that ‘The availability of a debtor’s earning capacity as an asset
free from the reach of creditors is what gives the debtor a new start’. 44 Upon
discharge, the former bankrupt is also free to acquire assets without the risk of
those assets being realised and distributed to creditors. 45 These provisions enable
the full potential of the debt discharge to be realised, and are therefore equally
consistent with the Bankruptcy Act having either a narrow or a wider fresh start
goal.
The scope of the fresh start upon discharge is also impacted by the conditions
imposed during bankruptcy. For example, during bankruptcy, creditors are not
generally permitted to pursue the debtor for payment of a provable debt. 46 This
facilitates one of the other goals of bankruptcy – equal treatment of, and
distribution among, creditors. 47 However, this provision may also contribute to a
rehabilitation-focused fresh start, because of the positive impact that ceasing
creditor contact can have on the physical and mental health of debtors. 48 Also,
subject to an obligation to make income contributions (mentioned below), the
effect of this provision is that any income earned during bankruptcy can be used
maintain basic living standards and/or take steps to improve the debtor’s financial
future.
Certain property is also exempt from realisation and distribution to creditors. This
includes basic household property, means of private transport, tools of trade, and
superannuation interests. 49 These exemptions facilitate the bankrupt maintaining
at least a basic standard of living and opportunity for employment and social
engagement, both during bankruptcy and following discharge from bankruptcy.
They therefore facilitate the wider, rehabilitation sense of the fresh start goal.
Without such exemptions being made available, the former bankrupt’s
opportunity to improve their financial future after bankruptcy is likely to be set
back some years, as they spend post-bankruptcy income in restoring basic
household goods, transport, and property needed for earning an income. 50
44
45
46
47
48
49
50
Howard, above n 14, 1085.
See Bankruptcy Act s 116(1), which provides that the bankrupt’s divisible property includes
property belonging to, or vesting in a bankrupt at the commencement of the bankruptcy, and
property acquired by the bankrupt after the commencement of bankruptcy and before
discharge.
Bankruptcy Act s 58(3).
For example, see Re McMaster; ex parte McMaster (1991) 33 FCR 70, 72-73, as per Hill J,
discussed below.
In a 1987-88 study of consumer bankruptcies in Melbourne, 59% of respondents thought that
creditor pressure played an important role in their decision to petition for bankruptcy, and 59%
of respondents reported that bankruptcy had improved their health: Martin Ryan, The Last
Resort: a Study of Consumer Bankrupts (Avebury, 1995) 153, 176.
Bankruptcy Act s 116(2); Bankruptcy Regulations 1996 (Cth) (‘Bankruptcy Regulations’) reg
6.03.
If these items were not exempted from realisation and distribution to creditors at the
commencement of bankruptcy, then there would be no point in the bankrupt purchasing such
items during bankruptcy. They would be similarly subject to realisation and distribution to
creditors: subject to the exemptions in Bankruptcy Act s 116(2), ‘after-acquired property’ vests
in the trustee and is available for realisation and distribution to creditors: Bankruptcy Act ss
58(1), 58(6), and 116(1).
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37
However, there are also some provisions in the bankruptcy legislation that
potentially reduce the potential for debtors to receive a fresh start upon discharge,
particularly in a wider rehabilitation sense. First, with a minimum bankruptcy
period of at least three years, access to the fresh start is delayed for a not
inconsiderable time, particular when compared to the length of bankruptcy in
some other comparable jurisdictions. 51 Second, the discharge of debt will not be
complete for all debtors. Some types of debts are not provable in a bankruptcy52
and others are not dischargeable in a bankruptcy, 53 and thus the debtor will remain
liable for those debts after discharge from bankruptcy. Further, a debtor will
remain liable for debts arising out of obligations incurred during the bankruptcy.54
Third, the public availability of bankruptcy information through the National
Personal Insolvency Index (‘NPII’) can potentially hinder a bankrupt or former
bankrupt in their efforts to maintain or gain employment and housing both during
and after bankruptcy. 55 Fourth, debtors who earn income above a prescribed
amount during bankruptcy will be required to make a contribution to the bankrupt
estate from their income. 56
Finally, while the rhetoric around bankruptcy refers to the need for a former
bankrupt to ‘learn’ from their bankruptcy, 57 there is little in the bankruptcy system
that facilitates such learning, or attempts to address the underlying problems that
lead to the insolvency in the first place. For example, John King notes that all that
is required under the Bankruptcy Act is for debtors to be provided with a brochure
outlining options, 58 and argues that this means that ‘any educative effect would be
fortuitous and ancillary’. 59 On the other hand, a study of bankrupts in Melbourne
51
52
53
54
55
56
57
58
59
For example, in the United Kingdom, discharge is available after 12 months, or earlier in some
circumstances: Insolvency Act 1986 (UK) pt IX c 1, s 279. In Canada, discharge is available
after 9 months for a first time bankrupt who is not required to make income contributions:
Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 168.1.
Bankruptcy Act ss 82(2) – (3B).
Bankruptcy Act ss 153(2) – (3).
The debts provable in the bankruptcy are only those to which the bankrupt was subject at the
date of the bankruptcy, or to which the bankrupt may be subject to before discharge as a result
of an obligation incurred before the date of bankruptcy: Bankruptcy Act s 82(1).
The National Personal Insolvency Index can be inspected by anyone on payment of a fee:
Bankruptcy Regulation reg 13.06. See also Australian Financial Security Authority, National
Personal Insolvency Index <https://www.afsa.gov.au/resources/npii>. The World Bank
suggests that this issue of discrimination against former bankrupts is one that requires further
research and consideration, suggesting that it is ‘advisable that both researchers and legislators
pay attention to the principle of non-discrimination in the future’: above n 20, World Bank
Report, 117.
Income contributions are calculated on the basis of 50% of the excess income earned above the
threshold: Bankruptcy Act s 139S. As at 23 October 2013, the income threshold for a person
with no dependents was $51,560.60: Australian Financial Security Authority, Indexed Amounts
(23 October 2013) <https://www.afsa.gov.au/resources/indexed-amounts>. Note that debtors
can request a higher threshold on the grounds of hardship: Bankruptcy Act s 139T.
See, for example, Attorney-General's Department, 'Proposed Amendments to the Bankruptcy
Act 1966' (Attorney-General's Department, 28 May 2009) 2 (‘Proposed Amendments Paper’).
See Bankruptcy Act s 55(3A), Bankruptcy Regulations reg 4.11(1).
King, above n 5, 685. Similarly, but in the context of business bankrupts, McAuley notes that
‘the statutory framework does nothing to encourage or indeed facilitate business bankrupts to
engage in education and counselling programs to avoid future bankruptcy’: Steve McAuley,
QUT Law Review Volume 14, Number 3, 2014
Special Edition: Bankruptcy
38
in 1987 and 1988 reported that, for some participants, the time out from the credit
economy that was provided by bankruptcy was sufficient to provide the necessary
‘learning’. 60 Given the changes in the economy, and access to the credit since
then, it would be interesting to examine the prevalence of such an attitude now.
This brief analysis suggests that the legislation facilitates at least a debt-discharge
focused fresh start. There are some provisions in the legislation that also facilitate
a wider, rehabilitation-focused, sense of the fresh start. However, these are
counter-balanced by other provisions that potentially hinder the achievability of a
rehabilitation-focused fresh start. 61 The text of the legislation therefore largely
points to the Bankruptcy Act having a fresh start goal that is focused on debtdischarge; rather than a fresh start goal that is focused on debtor rehabilitation.
C The fresh start goal in the parliamentary documents
The fresh start is mentioned in a number of parliamentary documents as being one
of the goals of the Bankruptcy Act; however, the documents do not provide a
consistent expression of the meaning of the fresh start. In some cases, the
relevant goal of the legislation is said to be one that focuses on providing relief
from debts; while in other cases, the goal is said to be one of debtor rehabilitation.
For example, in the Second Reading Speech introducing the Bankruptcy Act 1924
(Cth) (the first Commonwealth bankruptcy legislation), the then Attorney-General
referred, with approval, to a work by Ringwood (‘The Principles of Bankruptcy’),
and that author’s assessment of the ‘two great objects’ of bankruptcy as being
‘first, the distribution of the debtor’s effects in the most expeditious, equal and
economic manner; and secondly, his release from his creditors.’ 62
No further elaboration of the objects is provided, and the Attorney-General in this
speech makes no reference to the concept of the ‘fresh start’, or of the debtor’s
rehabilitation.
In the Second Reading Speech introducing the legislation that became the
Bankruptcy Act 1966 (Cth), the then Attorney-General indicated that the Bill ‘let
the basic structure of the law established by the present Act undisturbed’.
However, in comparing the 1965 Bill to the 1924 Act, the Attorney-General refers
to rehabilitation, rather than debt discharge, when he notes the main emphases of
the 1965 Bill as being ‘first, the rehabilitation of debtors whose circumstances are
due to misfortune; secondly a strengthening of the provisions aimed at the
punishment of dishonest debtors; and thirdly, the encouragement of private
trustees to take up the administration of bankrupt estates’. 63 The statement
60
61
62
63
'Reducing the Minimum Bankruptcy Period' (2010) 22(2) Australian Insolvency Journal 34,
34.
Ryan, above n 48, 247.
A more detailed analysis of the extent to which provisions in the Bankruptcy Act hinder a
rehabilitation-focused fresh start is the subject of a future article planned by the author.
Commonwealth, Parliamentary Debates, House of Representatives, 27 June 1924, 1715
(Littleton Groom, Attorney-General).
Commonwealth, Parliamentary Debates, House of Representatives, 20 May 1965, 1719 (Billy
Snedden, Attorney-General).
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appears to point more to the rationale for the changes introduced by the 1966 Act,
rather than the goals of the legislation overall. However, there is no further
discussion of what rehabilitation might mean in this context.
Similarly, there is not a consistent use of the terminology in the parliamentary
documents supporting later amendments to the Bankruptcy Act. For example, in
explaining the introduction of provisions given the Official Receiver the right to
reject a debtor’s petition on the grounds of abuse, the Explanatory Memorandum
to the Bankruptcy Legislation Amendment Bill 2002 notes that ‘One key purpose
of the bankruptcy system is to allow people in a hopeless financial position to rule
a line under their debts and be given a fresh start.’ 64 While not using the
terminology of fresh start, Senator Campbell’s second reading speech for the
Bankruptcy Legislation Amendment Bill 2002 (which, among other things,
repealed the early discharge provisions) categorised bankruptcy as being
‘designed to give people in severe financial difficulty relief, as a measure of last
resort, from overwhelming debts’. 65
On the other hand, the Explanatory Memorandum for the Bankruptcy Amendment
Bill 1991, in reference to the introduction of an improved process for applying for
early discharge, refers to the two principal aims of bankruptcy as ‘first being the
return of funds to creditors and second the rehabilitation of the bankrupt’.66 For
this Bill, early discharge was designed to ‘allow the debtor to begin the process of
financial rehabilitation at an early date’. 67 Again, however, there is no discussion
of what rehabilitation might mean or might require.
Thus, the Parliamentary material does not indicate a consistent view about
whether a key goal of the bankruptcy legislation, from the perspective of the
debtor, is to provide for a fresh start solely by way of relief from debts, or also by
way of facilitating debtor rehabilitation.
D The scope of the fresh start as identified by the cases
In this next section, I explore the extent to which the case law provides any type
of guidance on the fresh start concept as a goal of the Bankruptcy Act. The cases
are, of course, interpreting the legislation as it is written, and in response to the
particular disputes that are litigated. In those circumstances, and where the text of
the legislation does not appear to facilitate a wider, rehabilitation sense of the
fresh start, it is not surprising that the case law also has little emphasis on a
rehabilitation focus for the fresh start.
There are few references to a fresh start goal for the Bankruptcy Act in the cases
decided in the superior courts. The High Court does not seem to have referred to
64
65
66
67
Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2002 (Cth) 17. See also
an acknowledgement in the Explanatory Memorandum that the (bankruptcy) laws ‘are
intended to protect debtors who cannot pay their debts, and to give them a fresh start’:
Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2002 (Cth) 9.
Commonwealth, Parliamentary Debates, Senate, 19 June 2002, 2091 (Ian Campbell).
Explanatory Memorandum, Bankruptcy Amendment Bill 1991 (Cth) 2.
Explanatory Memorandum, Bankruptcy Amendment Bill 1991 (Cth) 2.
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the fresh start as a goal of the Bankruptcy Act. However, it has confirmed the
importance of debt discharge as the one of the goals. For example, in the decision
of Storey v Lane, Gibbs CJ in a judgment agreed to by Mason, Wilson and
Brennan, stated that:
An essential feature of any modern system of bankruptcy is that provision is
made for the appropriation of the assets of the debtor and their equitable
distribution amongst his creditors, and for the discharge of the debtor from
future liability for his existing debts. 68
In the High Court decision of Foots v Southern Cross Mine Management Pty
Ltd 69 (‘Foots’) (a decision about whether a costs order made after bankruptcy was
a provable debt), both the majority and minority judgments appear to accept the
proposition that debt discharge is an goal of the Bankruptcy Act. Both judgments
refer to a statement of the purposes of the Bankruptcy Act 1869 (UK) (on which
the Australian legislation was based) set out in Ex parte Llynvi Coal and Iron Co;
Re Hide. 70 In that case, James LJ remarked that ‘The broad purview of this Act
is, that the bankrupt is to be a freed man – freed not only from debts, but from
contracts, liabilities, engagements and contingencies of every kind.’ 71
However, the majority judgment took the view that this broad purview should not
obscure ‘the current statutory description of what is and is not provable in
bankruptcy’, and found that the debt was not provable. 72 In contrast, in his
dissent Kirby J suggested that ‘To the extent that the statutory language permits,
this Court should endeavour to advance, and not to frustrate, the attainment of this
[free man] objective’. 73
One of the most frequently referenced expression of the goals or purposes of the
Bankruptcy Act is found in the Federal Court of Australia decision of Re
McMaster; ex parte McMaster (‘Re McMaster’):
The modern bankruptcy law serves three purposes. The first is to ensure that the
assets of the bankrupt are distributed rateably among creditors. The second, which
is interrelated with the first, is to ensure that one creditor does not obtain an undue
advantage over other creditors. The third is to bring about the discharge of the
debtor from future liability for his existing debts, so that the debtor may start
afresh. 74
Numerous cases have referenced, with apparent approval, these three purposes as
stated in Re McMaster, including majority decisions in the Full Court of the
68
69
70
71
72
73
74
Storey v Lane (1981) 147 CLR 549, 556 (Mason, Wilson, Brennan JJ agreeing).
(2007) 234 CLR 52.
(1871) LR 7 Ch 28.
Ex parte Llynvi Coal and Iron Co; Re Hide (1871) LR 7 Ch 28, 32 (James LJ).
Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52, 58.
Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52, 92; see also Kirby J’s
dissent in Coventry v Charter Pacific Corporation Limited (2005) 27 CLR 234, 269-70, where
he discusses the purposes of the Bankruptcy Act.
Re McMaster; ex parte McMaster (1991) 33 FCR 70, 72-73 per Hill J.
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Federal Court, 75 as well as decisions in other courts. 76 This expression of the
purposes in Re McMaster has also been referred to by academic commentators as
authority for the Bankruptcy Act having a fresh start objective. 77 Other cases have
made specific reference to the goal of the legislation being to enable a fresh start
by discharging liability for the debts existing at the time of bankruptcy. 78
However, while the superior decisions focus on debt discharge as a goal of the
Bankruptcy Act, there are also some cases where the judgment appears to reflect a
concept of bankruptcy that, from the debtor’s perspective, offers more than just
debt discharge. For example, in FWO Nominees v Jackson-Grose (No.1), the
court suggests that the purpose of bankruptcy legislation is to:
[E]nsure that persons who do not have assets and who owe large sums of money
are placed into the control of a trustee so that their affairs can be sorted out, a veil
can be drawn over previous activity, and they can proceed to live in a normal
financial state as soon as possible. 79
In Re Reilly; Ex Parte The Debtor, 80 in considering whether he should grant an
application for discharge, Lockhart J explained the authorities as saying that,
unless satisfied that the debtor has sufficient income to support himself and any
dependents, or is likely to inherit or succeed to property, the court ought not to
impose on the debtor ‘unduly burdensome conditions so that he cannot improve
his position in life and remove all incentive for exertion on his part.’ 81 Lockhart J
also considered relevant the impact of the bankruptcy upon the bankrupt’s plans
to marry. In granting the application for discharge, Lockhart J also explained:
He is entitled to a fresh start in life and to make his decisions as to marriage and
employment unfettered by his bankruptcy, notwithstanding that his application is
made soon after his bankruptcy. 82
75
76
77
78
79
80
81
82
For example, Fraser v Deputy Commissioner of Taxation (Cth) and Official Trustee (1996) 69
FCR 99, 112; Pietropaoli v Travel Compensation Fund [1998] FCA 1774.
For example, Otvosi v Ferella (2008) 219 FLR 472, 477 (a decision on the scope of
Bankruptcy Act s 58(3)); Pedersen v Delaveris [2010] FCA 536, [13]; Rodway v White (2009)
233 FLR 262, 271; 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328, [7]; MooreMcQuillan v Scott (2006) 149 FCR 486, 490.
For example, King, above n 5, 658; Lynden Griggs also asserts that it is a principle of the
legislation that the bankrupt should be freed from his or her liabilities: Griggs, above n 5, 59.
For example, in Fitz-Gibbon v Inspector General in Bankruptcy (2000) 180 ALR 475, 479
Stone J refers to the ‘well established’ policy of bankruptcy legislation as being ‘to strike a
balance between the orderly winding up of the bankrupt's estate for the benefit of creditors and
freeing the bankrupt from accumulated liabilities so that he or she can make a fresh start’. See
also Boral Johns Perry Industries Pty Ltd v Piccardi (Unreported, Full Court of the Federal
Court of Australia, Wilcox, Burchett and Hill JJ, 23 June 1989): ‘The policy of the bankruptcy
legislation is that an adjudication of bankruptcy will relieve a debtor from his debts, thus
enabling him to make a fresh start and ensuring that the assets of the bankrupt are distributed
rateably among his creditors’.
FWO Nominees v Jackson-Grose (No.1) [2002] FMCA 194 (27 August 2002), [14].
1979) 23 ALR 357.
(1979) 23 ALR 357, 367.
Re Reilly; Ex Parte the Debtor (1979) 23 ALR 357, 367. The Court also referred to the
‘personal sense of shame’ of the bankrupt as impacting upon ‘the uncertainty that surrounds
any prospective marriage: 366-7.
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Reference to the fresh start objective is also made in decisions on the scope of the
‘tools of trade’ exemption in the Bankruptcy Act. 83 In Re Vaughan; Vaughan v
Official Trustee in Bankruptcy Heerey J explained the purposes of the Bankruptcy
Act as follows:
But one of the underlying purposes of the Act is to give bankrupts the opportunity
of a fresh start after surrendering virtually all their property for the benefit of their
creditors. To allow a bankrupt to retain tools of modest value for the purposes of a
trade that he or she can carry on, even one that had only been conducted in a minor
way prior to bankruptcy, or perhaps not at all, is consistent with that purpose.84
This statement was not contradicted on appeal. 85
Another decision that suggests that the fresh start goal of bankruptcy is about
more than debt discharge is Exell and Inspector-General in Bankruptcy. 86 The
case involved the review of a trustee’s decision to remit realisation charges, and in
discussing the hardship of imposing the realisation charge, the AAT President
noted that the applicant was in a ‘precarious financial position’, had no earning
capacity, and was not in a position to have the capacity to make a fresh start and
retrieve her financial prosperity. 87 This suggests recognition of the possibility
that, at least for this debtor, in the absence of a capacity to earn income, debt
discharge would not be sufficient to provide a fresh start.
The above discussion demonstrates that there is not always a consistent view from
the cases about the scope or meaning of any fresh start objective in the
Bankruptcy Act. The discussion of the purposes in Re McMaster, with reference to
the ‘discharge of the debtor from future liability for existing debts’ appears to
have support, and is also consistent with the High Court’s emphasis on debt
discharge as in Storey v Lane and Foots. There are some judicial comments that
suggest perhaps a wider view of the fresh start objective, with debt discharge not
being the only focus, but these are not widespread. In addition, these comments
are often not necessary to the decision, nor are they found in the majority
judgments of appeal cases. They therefore have limited precedent value.
E The fresh start goal in the law reform documents
Finally, I turn to the major reviews of bankruptcy law, and consider what
guidance these documents provide as to the existence and scope of a fresh start
objective in the Bankruptcy Act.
In 1962, the Report of the Committee Appointed by the Attorney-General of the
Commonwealth to review the bankruptcy law of the Commonwealth (Clyne
Committee Report) was released. This report was the first major review of
bankruptcy law in Australia since the implementation of the first Commonwealth
83
84
85
86
87
Bankruptcy Act s 116(2)(c).
Re Vaughan; Vaughan v Official Trustee in Bankruptcy (1996) 66 FCR 121, 123-4.
Vaughan v Official Trustee in Bankruptcy (1996) 71 FCR 34. See also Tiver v The Official
Trustee in Bankruptcy (2010) 187 FCR 1, 11.
(2000) 30 AAR 320, 327.
Exell and Inspector-General in Bankruptcy (2000) 30 AAR 320, 327.
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legislation dealing with bankruptcy (the Bankruptcy Act 1924 (Cth)), and its
recommendations formed the basis for the Bankruptcy Act 1966 (Cth). 88 While
the Clyne Committee Report did refer to the history of bankruptcy legislation in
Australia and the UK (from where Australia’s bankruptcy legislation was
derived), the report did not engage extensively with the purposes of bankruptcy
law. It noted that the need for bankruptcy law was not in dispute, and that the
principles underlying bankruptcy law were ‘firm and long established’. 89 The
report considered that the principles included (at least in the case of honest
debtors) the availability of both release from liabilities and “the opportunity to reestablish himself”. 90 This reference to a debtor being able to re-establish him or
herself might be seen as akin to the idea of debtor rehabilitation. Later, the report
refers explicitly to the idea that an honest bankrupt should be given an opportunity
to make a ‘fresh start’, 91 but does not provide any further discussion of what this
might mean.
In 1977, the then Law Reform Commission (now the Australian Law Reform
Commission) released its report, Insolvency: the Regular Payment of Debts, 92
(‘Regular Payment of Debts Report’) and this included an examination of the
philosophy of bankruptcy. In this context, the report suggested that debtor
rehabilitation is ‘the prime concern of the bankruptcy process’, 93 and that the law
must ‘enhance, rather than impede, opportunities for the financial rehabilitation of
insolvent debtors’. 94
Unlike much of the commentary on the fresh start and related concepts, the
Regular Payment of Debts Report also engaged with what debtor rehabilitation
might mean in the context of bankruptcy. It referenced (with approval) 95 reviews
in United States and Canada that assert the importance of debtor rehabilitation, 96
and suggested that the following were needed for true rehabilitation:
•
88
89
90
91
92
93
94
95
96
Present debt difficulties must be cured;
In the Second Reading Speech introducing the Bankruptcy Bill 1965, the Attorney-General
explained that the bill presented to Parliament was ‘for the most part, the bill as recommended
by the Committee’: Commonwealth, Parliamentary Debates, House of Representatives, 20
May 1965, 1713 (Billy Snedden, Attorney-General).
Committee Appointed by the Attorney-General of the Commonwealth to Review the
Bankruptcy Law of the Commonwealth, 'Report of the Committee Appointed by the AttorneyGeneral of the Commonwealth to Review the Bankruptcy Law of the Commonwealth'
(Government of the Commonwealth of Australia, 1962) 8.
Ibid 8. The report also takes the view that there is community acceptance of the proposition
that there should be equitable distribution of property amongst creditors, and that there needs
to be provision for dealing with dishonest debtors: at 8; see also 33 in relation to equitable
distribution.
Ibid 16.
The Law Reform Commission, Insolvency: the Regular Payment of Debts, Report No 6 (1977)
(‘Regular Payment of Debts Report’).
Ibid 67. The terms of reference for the review specifically ask the Commission to have regard
to ‘the community’s interests in the financial rehabilitation of small but honest debtors’: at v.
Ibid 2.
The Law Reform Commission notes that ‘[these] views have great force’: ibid 67.
Ibid 67.
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•
•
An improved sense of budgeting and of the danger of over commitment of
meagre income;
A proper understanding of credit and a sense of his own responsibilities in
the payment of obligations freely undertaken 97 (acknowledging that, in
some circumstances, this responsibility could be engendered through
requiring income contributions). 98
The Law Reform Commission argued that ‘the law relating to discharge and to
income contributions reflects little concern for the rehabilitation of debtors’, and
made a number of recommendations designed to reverse that situation. In
particular, the Law Reform Commission recommended the introduction of
automatic discharge for non-business debtors after six months, subject to the
opportunity to object to discharge on limited grounds, 99 and that the need to
rehabilitate debtors should be considered when determining whether discharge
should be delayed or made conditional. 100
However, the recommendations of the Law Reform Commission on discharge and
rehabilitation were only partially implemented. The minimum bankruptcy period
is now three years, 101 but this is significantly longer than the six months
recommended by the Law Reform Commission. 102 Further, the impact of
discharge on debtor rehabilitation is not a consideration in the process for
reviewing a trustee’s objection to automatic discharge. 103
A more consistent mechanism for assessing income contributions was also
introduced in 1991, 104 perhaps addressing in part the LRC’s concern for debtor
responsibility. However, there have not been any amendments that would
explicitly facilitate the development of improved budgeting, or a proper
understanding of credit, that were the other components of rehabilitation as
identified by the Law Reform Commission. 105 Ultimately, it appears that the Law
Reform Commission’s views about the importance of debtor rehabilitation have
not been reflected in the bankruptcy legislation.
97
98
99
100
101
102
103
104
105
Ibid 68.
Ibid 68.
Ibid xi.
Ibid xi.
Bankruptcy Act s 149.
Early discharge after six months was also available between 1991 and 2002 (see Bankruptcy
Act div 3, subdiv D (repealed)). However, it was only available in limited circumstances, and
the potential for debtor rehabilitation was not reflected in the criteria for access to early
discharge. See also discussion of the rise and fall of early discharge in the Bankruptcy Act in
King, above n 5, 664-5.
The focus of a review of an objection is on whether the trustee had reasons for objecting that
were directed to achievement of a purpose of bankruptcy law, for example, the recovery of
assets for creditors: Inspector-General in Bankruptcy v Nelson (1998) 86 FCR 67, 78; 27 AAR
231, 241. See also s149N, which sets outs the circumstances in which the Inspector-General
must cancel the objection. None of these reasons refer to the impact of the objection on the
debtor’s rehabilitation.
See Bankruptcy Act Part VI, div 4B.
This contrasts with the introduction of mandatory financial education for debtors entering and
exiting bankruptcy in the United States. See discussion of the requirements in Gross and
Block-Lieb, above n 25, 550-552.
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The Law Reform Commission also published a more extensive report on personal
and corporate insolvency in 1988, the General Insolvency Inquiry (‘Harmer
Report’). 106 This report did not directly spell out the overall goals or objectives of
insolvency law, but it proposed nine ‘principles that should guide the
development of a modern [personal and corporate] insolvency law’. 107 None of
these principles refer explicitly to the need for the debtor to gain a fresh start, or to
be rehabilitated. The most relevant principle is that ‘the end result of an
insolvency administration, particularly as it affects individuals should, with very
limited exceptions, be the effective relief or release from the financial liabilities
and obligations of the insolvent’. 108 This is consistent with a fresh start that is
primarily about debt discharge, rather than the wider idea of a fresh start that is
focused on debtor rehabilitation.
The report included some references to the concept of the fresh start, but
predominantly in the context of a discussion on debt-discharge. 109 There are also
a number of references to the concept of debtor rehabilitation, and the associated
discussion provides some support for the idea that debtor rehabilitation should be
a consideration for bankruptcy law. 110 The report also made a number of
recommendations that could facilitate debtor rehabilitation, including
recommendations that:
•
•
•
•
•
debtors be required to obtain pre-bankruptcy advice; 111
a federally funded advice service should be established; 112
early discharge be made available, following a trustee’s report that
considered factors such as the debtor’s future financial prospects and
aspirations and whether bankruptcy would adversely affect the debtor’s
employment prospects; 113
where the eligibility for discharge was being considered, the Court should
be directed to factors such as the debtor’s financial rehabilitation; 114
postponement of the sale of the debtor’s residence be made available. 115
None of these recommendations have been implemented.
More recently, a concern for debtor rehabilitation was expressed in some initial
proposals for law reform identified by the Attorney-General’s Department. In
106
107
108
109
110
111
112
113
114
115
The Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) (‘Harmer
Report’).
Ibid 15-17.
Ibid 16.
For example, ibid 183, where the Law Reform Commission notes that voluntary bankruptcy ‘is
… resorted to by many insolvent debtors to discharge impossible or unmanageable debt
burdens and to enable a ‘fresh start’ to be made.’
For example, ibid 230, 319, 345, 363.
Ibid 200-201.
Ibid 203.
Ibid 235.
Ibid 239. Under the Law Reform Commission’s recommendations, a debtor who had been
bankrupt in the previous five years would not be entitled to automatic discharge, and would
need to apply to the court for discharge: at 236.
Ibid 366-367.
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2009, the Attorney-General’s Department distributed a short document titled
Proposed Amendments to the Bankruptcy Act 1966 (‘Proposed Amendments
Paper’), 116 the purpose of which was to ‘set out some ideas for responding to
increasing numbers of bankruptcies and other personal insolvency
administrations’. 117 This paper suggested that some restrictions and consequences
of bankruptcy ‘do not assist in rehabilitating the debtor or result in any greater
returns for creditors’, 118 and that ‘the aim of the system should be to deal quickly
with the person’s insolvency and get them on track to start contributing once
again to the economy’. 119 Specifically, the paper suggested that the goal of
providing a fresh start is being hindered by the permanency of the public record of
bankruptcy on the NPII. 120 The idea of rehabilitation is also specifically referred
to in the context of arguing for a shorter bankruptcy period, where it is suggested
that if a shorter period was made available, it would not be available for second
time bankrupts, because a person who has failed once, should be expected to learn
how to avoid failing a second time. 121 These comments suggest a preference for
an understanding of the fresh start that is focused on debtor rehabilitation.
However, the proposals for change to the NPII and early discharge have not been
implemented.
These reviews by the Law Reform Commission and the paper released by the
Attorney-General’s Department focus on debtor rehabilitation as a goal of the
Bankruptcy Act, however, the suggested amendments to facilitate rehabilitation
have not been made, or have not been fully implemented.
F Overview of the scope of the fresh start goal in Australia
The idea of bankruptcy providing a fresh start for debtors is a popular one, and
this analysis of the key primary and secondary documents supports the view that
one of the objectives of the Bankruptcy Act is to provide the opportunity for a
fresh start to debtors. The scope of the fresh start to be delivered by the
Bankruptcy Act is not defined or made explicit in the legislative or judicial
documents. However, the overriding emphasis of the legislation and the case law
is on a relatively narrow idea of the fresh start, where the focus is on the debtor
having a clean slate at the conclusion of bankruptcy, and this is achieved through
the discharge of liability for the debts existing at the time of bankruptcy. This is
also consistent with the relevant principle for a modern insolvency law, as set out
in the Harmer Report, 122 and the objectives of the Bankruptcy Act as described by
the regulator in its Annual Report. 123
116
117
118
119
120
121
122
123
Proposed Amendments Paper, above n 57. Copy on file with the author. It is not clear how
widely this document was circulated.
Ibid 1.
Ibid 1.
Ibid 1.
Ibid 3.
Ibid 2.
Harmer Report, above n 106, 16.
Insolvency and Trustee Service Australia Annual Report 2012-13, 70. The most relevant
objective is described by the regulator as ‘to release insolvent debtors from debt’.
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Some cases and the law reviews do provide support for a wider view of the fresh
start concept, suggesting that matters such as financial literacy and financial
capability, and constraints on the public availability of bankruptcy information are
also crucial if a debtor is to receive the opportunity for a fresh start. However,
despite these nods to the idea of a rehabilitation-focused fresh start, there has been
little change to the legislation to facilitate this wider sense of the fresh start. Thus,
the fresh start as it has been implemented in practice is focused on debt discharge,
rather than debtor rehabilitation.
IV
DISCUSSION AND IMPLICATIONS
A Clarifying the fresh start goal
As discussed above, there is a lack of clarity about the existence and scope of the
fresh start goal in the Bankruptcy Act, and this will hinder attempts to assess the
effectiveness or otherwise of the Bankruptcy Act. The examination of the relevant
primary and secondary sources above suggests that providing a fresh start for
debtors (or the opportunity for a fresh start) is one of the primary goals of the
bankruptcy legislations, and that the type of fresh start that is envisaged is a fresh
start that is focused on, and delivered by, discharge of liability for the debts
existing at the time of bankruptcy. However, this goal is not explicitly stated in
the legislation; nor are the other key goals of the Bankruptcy Act.
In the absence of an objects clause, the purposes or objectives of legislation can
be determined from the text of the legislation. A formal objects clause, however,
can provide some clarity and consistency as to scope of the objects or purpose of
the legislation. It may also be able to provide some guidance as to how to proceed
when there is a potential conflict of goals. A relevant example here is in relation
to the question of whether a particular debt should be able to be proved or
discharged in a bankruptcy. Non-provability or non-dischargability of a particular
type of debt clearly inhibits a fresh start goal that is focused on debt discharge.
However, in some cases, such a categorisation may reflect a view that the fresh
start goal should be subjugated to another goal of the legislation. 124
An objects clause has the primary function of assisting in the interpretation of the
existing provisions of legislation. It does not give the judiciary any ability to
introduce new clauses, or amend existing clauses, that might further the specified
objects. However, clarifying the overarching objects of the legislation can
potentially provide an impetus to the Parliament to consider whether change is
needed to better facilitate the achievement of those objects, and can provide a
framework for developing and assessing law reform proposals.
Introducing an objects clause into the Bankruptcy Act would provide the
opportunity to clarify the key goals of the Bankruptcy Act and their scope. Any
such clause should include a reference to the fresh start, and some guidance as to
the scope or meaning of this goal. To be consistent with the scope of the fresh
start goal as it is currently delivered by the legislation, and interpreted by the
124
As an example, see the discussion of Pyramid Building Society (in liq) v Terry (1997) 189
CLR 176; (whether a contingent debt is provable) in Griggs, above n 5, 57.
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courts, the meaning would emphasise debt discharge. In relation to the fresh start
goal, an objects clause could, for example, be based on the relevant principle from
the Harmer Report, that ‘the end result of an insolvency administration … should
be the effective relief or release from the financial liabilities and obligations of the
insolvent’. 125 Such a clause would also benefit from some general qualification of
the types of debts from which there would be no release.
B Assessing the achievement of the fresh start goal
If, as I have argued, the fresh start in the Bankruptcy Act focuses on discharge of
debt, the task of assessing the extent to which the fresh start is achieved in
practice is a relatively straightforward task, requiring, for example, information
on:
•
•
•
The number of people who exit bankruptcy with non-dischargeable and/or
non-provable debts;
The type and size of any such debts; and
The number of people who exit bankruptcy free from all debts.
This information on the debts held by those exiting bankruptcy is not currently
published or (to my knowledge) specifically collected or collated into one dataset.
However, it may be able to be compiled or extrapolated from existing sources of
information provided to AFSA and/or bankruptcy trustees during the bankruptcy
process. For example, every debtor entering bankruptcy must submit a Statement
of Affairs, and this must include information about all secured and unsecured
debts; this should include debts that are not provable and/or not dischargeable in
the bankruptcy. 126 Further, upon becoming bankrupt, a debtor must provide to the
trustee all documents and papers relevant to their bankruptcy. 127 Creditors of a
bankrupt will provide a proof of debt to the bankruptcy trustee, 128 and this may
also contain relevant information for assessing the extent of non-provable or nondischargeable debts, at least at the time of entering the bankruptcy.
There are also other existing datasets that are likely to contain information on a
debtor’s credit position at the time of entering or exiting bankruptcy. For
example, recent amendments to the Privacy Act 1988 (Cth) will allow for the
collection of more comprehensive information about credit commitments than has
previously been permitted, including credit accounts held and credit limits on
those accounts. 129 And a number of categories of non-dischargeable or nonprovable debts will be recorded by the courts (for example, penalties and fines
imposed by a court in relation to offences, 130 civil penalties imposed by the
Corporations Act), 131 or other government agencies (for example, tertiary debts132
125
Harmer Report, above n 106, 16.
See, Bankruptcy Act ITSA Form 3: Statement of Affairs.
127
Bankruptcy Act s 77(1)(a).
128
Bankruptcy Act s 84.
129
See Privacy Amendment (Enhancing Privacy Protection) Act (Cth) 2012, Schedule 2 (this
includes the introduction of a new Part IIIA on credit reporting).
130
Bankruptcy Act s 82(3).
131
Bankruptcy Act s 82(3AA).
126
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will be recorded by the Australian Taxation Office). With appropriate privacy
protections, this information (or subsets of it) could potentially be reviewed and
analysed (on a non-identifiable basis) to facilitate an understanding of the extent
to which debtors exit bankruptcy free of debts.
There is no guarantee that all of the information compiled from these sources will
be complete. 133 However, it can begin to provide a picture of the extent to which
a fresh start is achieved at the conclusion of bankruptcy.
Another option would be to collect data and information directly from individuals
at the time of discharge from bankruptcy. The regulator has previously
commissioned surveys of individuals who enter Part IX debt agreements, and
these have informed the various amendments to the regulatory framework for debt
agreements. 134 A similar approach could be taken to exploring the achievement
of the fresh start.
Collecting and reviewing information about the existence and size of nonprovable and non-dischargeable debts will enable an assessment of the percentage
of debtors who receive a fresh start (defined as debt discharge) at the conclusion
of their bankruptcy. If a significant percentage of debtors do not receive a fresh
start in this sense, then attention may need to be given to the categories of nonprovable and non-dischargeable debts. Such a review could ensure that the
categories are appropriate, and that they mirror a community preference for other
goals to prevail over the fresh start goal. In any case, clarity about the scope of
the various goals of the bankruptcy legislation is the first step to addressing any
conflict between the different goals.
However, information on the economic and social position of debtors after
bankruptcy (particularly sometime after bankruptcy) would not be needed for an
assessment of the achievement of a debt discharge-focused fresh start. Further,
the level of repeat bankruptcies would not be directly relevant to an assessment of
achievement or otherwise of the fresh start goal as envisaged here. 135
C The need for a broader review
132
Bankruptcy Act s 82(3AB).
This is perhaps particularly the case of information in the Statement of Affairs, many people
apply for bankruptcy without seeking advice from the regulator or an insolvency professional
(23% of bankrupts in 2011: see Insolvency and Trustee Service Australia, Profile of Debtors
2011 (2012) 14
<https://www.afsa.gov.au/resources/statistics/profiles-of-debtors-documents/profiles-ofdebtors-2011>).
134
See Measured Insights, 'Survey Research into the Experience of Debtors who Lodged their
Debt Agreement Proposals with ITSA during the Period 1 November 2007 to 29 February
2008' (2008); The Empower Group, 'Debt Agreement Debtor Research Report' (2004) (copies
on file with the author). These reports do not appear to be available on AFSA’s website, but
some of the findings are discussed in Ian Ramsay and Cameron Sim, 'The Role and Use of
Debt Agreements in Australian Personal Insolvency Law' (2011) 19 Insolvency Law Journal
168.
135
Note that the regulator does publish statistics on repeat bankruptcies, see Insolvency and
Trustee Service Australia, Profile of Debtors 2011 (2012) 15.
133
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I have argued above that there is a need for clarity about the scope of the fresh
start goal for the Bankruptcy Act, and that one way to provide this clarity would
be to insert an objects clause into the Bankruptcy Act. In relation to the fresh start
goal, this should be consistent with the debt-discharge focused idea of the fresh
start that is dominant in the primary and secondary materials discussed above.
However, there are also a number of references in the key documents to the
importance of debtor rehabilitation, a concept that goes beyond the idea of debt
discharge to incorporate changes in debtor behaviour, knowledge, opportunities
and/or circumstances. In addition, there is often discomfort with the idea that
individuals might use bankruptcy on more than one occasion; 136 and this also
points to an expectation of debtor rehabilitation through the bankruptcy process.
This concern for debtor rehabilitation is not encompassed by the concept of the
fresh start as is currently provided, but its existence provides an opportunity to
examine whether a wider meaning of the fresh start goal is more appropriate.
Examining the scope of the fresh start goal could be achieved as part of a
comprehensive review of the Bankruptcy Act. As mentioned above, the most
recent complete review of the Bankruptcy Act occurred in 1988 (the Harmer
Report). Although this report came up with the nine principles for an insolvency
law, it did not articulate these in the form of specific goals or objects for the
Bankruptcy Act. Further, despite a number of references and recommendations
relevant to debtor rehabilitation in the text of the report, rehabilitation of the
debtor does not feature in the nine principles. In addition, the Harmer Report
took place more than 25 years ago, and there have been significant changes in the
economy, in credit markets, and in credit regulation since then. There have been
various amendments to the Bankruptcy Act in the interim period, but these have
often responded to particular issues or cases, and have been described as being adhoc or piecemeal, 137 rather than resulting from a considered and holistic
assessment of the operation of the Bankruptcy Act in its totality.
While ad hoc development of the legislation is necessary if it is to be responsive
to legal and economic developments, at some point it becomes appropriate to
undertake a comprehensive review. 138 Among other things, a comprehensive
review would provide the opportunity for clarification or expansion of the scope
of the fresh start goal and other goals for the bankruptcy legislation, and to
consider the relationship between the various goals. It would also be an
opportunity to review the Bankruptcy Act in light of the preferred goals, and the
extent to which the current provisions facilitate or inhibit the achievement of the
various goals, including the (clarified) fresh start goal. In particular, if there was a
preference for a wider rehabilitation-focused fresh start goal, a review could
136
See, for example, Proposed Amendments Paper, above n 57; Harmer Report, above n 106, 236.
See for example, Ramsay and Sim, above n 7, 303; King, above n 5, 657, 688, where King
suggests that Andrew Keay’s criticism of the history of bankruptcy decision-making in the
United Kingdom as ‘ad hoc’ could apply equally to Australia; Michael Murray and Jason
Harris, Keay's Insolvency: Personal and Corporate Law and Practice (Thomson Reuters,
2011) 10, who suggest that changes in bankruptcy law have ‘often been in response to a
particular issue, or case’. See also ibid 686.
138
Murray and Harris have called for ‘a rewriting of our personal and corporate insolvency laws’:
ibid 698.
137
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consider what (if any) legislative amendment is needed to better facilitate this
fresh start goal. 139
Finally, a review would be an opportunity to acknowledge the influence of
matters outside the Bankruptcy Act in influencing the fresh start goal, and would
facilitate consideration of any changes to other laws and aspects of social policy
that similarly have the potential to affect the achievement of the fresh start goal.
If, as a result of such a review, a wider rehabilitation-focused fresh start became
one of the objects of the Bankruptcy Act, it will not be enough to examine the
extent to which debtors have non-dischargeable and/or non-provable debts at the
conclusion of their bankruptcy in order to assess whether this wider fresh start
goal is achieved. Instead, the assessment of the fresh start goal for individual
debtors will need to consider a wider range of information, and possible over a
longer period of time, having regard to their individual financial position and
circumstances in the post-bankruptcy phase. This information may be more
difficult to collect, but it is not impossible. 140
V
CONCLUSION
In Australia’s recent past, more than 20,000 individuals have entered bankruptcy
each year, 141 and many more individuals (for example, family members) have also
been directly and indirectly affected by bankruptcy. Bankruptcy also has
widespread effects on creditors, both small and large, and the wider community
(including future creditors) more generally. 142 The Bankruptcy Act therefore
plays a critical role in the economic and social framework.
Given the breadth of the impact of bankruptcy, evaluating the Bankruptcy Act
against its goals should be a regular focus of politicians and policy makers. But,
for such a task, clarity about the goals is needed. This paper has examined one of
the assumed goals of the Bankruptcy Act – that of providing a fresh start (or the
opportunity of a fresh start) to debtors, and argues that, although there is a
consensus that the fresh start is a goal, the concept is currently not well defined.
Introducing an objects clause to the Bankruptcy Act is a relatively straightforward
139
140
141
142
For example, the World Bank suggests that attention needs to be paid to the principle of nondiscrimination between former bankrupts and others who have not previously been bankrupt:
above n 20, World Bank Report, 119.
Some examples of studies in the United States examining the achievement of the fresh start
include those of Zagorsky and Lupica, who examine the time period over which it takes former
bankrupts to ‘catch-up’ to non-bankrupt peers on various financial indicators: Zagorsky and
Lupica, above n 4; and Porter and Thorne, who examine how debtors’ view the impact of
bankruptcy on their financial positions one year after bankruptcy: Porter and Thorne, above n
12.
There have been more than 20,000 bankruptcies in each year since 2007-08, and this number
increased to more than 27,000 in 2008-09 and 2009-10: Insolvency and Trustee Service
Australia Annual Report 2012-13 71.
For a discussion of the different interests in bankruptcy, see Andrew Keay, 'Balancing Interests
in Bankruptcy Law' (2001) 30 Common Law World Review 206, 210-221. For a more
expansive discussion on the community interest in bankruptcy, see Karen Gross, 'Taking
Community Interests into Account in Bankruptcy: an Essay' (1994) 72 Washington University
Law Quarterly 1031.
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way to provide a clear guidance on the existence and scope of the fresh start goal.
To be consistent with the understanding that has been identified in the primary
and secondary documents in this paper, any objects clause should reflect a debtdischarge focused fresh start.
However, this need not be the final word. Instead, the somewhat ad hoc
development of the Bankruptcy Act in the recent past suggest it could now be an
opportune time to review the goals of the Bankruptcy Act (and indeed the
operation of the Bankruptcy Act more broadly) and consider whether a fresh start
goal that has a rehabilitation-focus would better reflect our complex, consumer
society. Amending the Bankruptcy Act to include and facilitate such a goal might
mean that bankruptcy could provide debtors with something more than a
temporary reprieve; it could instead facilitate a real pathway to an improved
financial future for many debtors entering bankruptcy to avoid the quagmire of
unmanageable debt.